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What is the difference between Debt Consolidation and Debt Settlement?!

Published by admin on December 18, 2009

What is the difference between Debt Consolidation and Debt Settlement?!

Debt Arrangement and debt consolidation are not the same. While they both help to reduce your debt, they all affect your credit score and other wallet. Before you sign with a debt management company, make sure you understand the pros and cons of their approach. And of course, be a smart shopper before signing a contract.

Debt Settlement – Eliminate Debt Directly

The moment you are going to use a debt settlement company, your creditors to wipe a part of your debt immediately. This is happening because they are afraid that you can go bankrupt and that they will not see any of the money owned, this way the creditors will reduce your debt. With smaller payments, you can easily wipe out all your current debt and get out of debt very fast.

But with debt settlement, your credit score might be in a bad shape for a few years. Debt settlement will be treated as a foreclosure or bankruptcy by the lenders, since no creditor wants to see the debt reduced. So it will be difficult to obtain decent loan in the future, at least for two years. You will also eliminate the total tax amount, which is great. However the debt settlement agencies are a better approach to debt than any other option that you have right now.

Debt Consolidation – A Slow Approach to Debt

Debt Consolidation companies are going to deal with your creditors and payments. You send them a payment, from which they are going to pay your bills. They also negotiate lower rates with your creditors to help you out of debt earlier.

With this approach your creditors are going to freeze access to any new loan. They will want to see in the next year that you make regular payments and that you start to reduce your debt. Your credit score may also drop, as lenders report that you work with a debt consolidation company. But after one year you will be able to apply for new credit, possibly with some prime rates.

Research Before You Sign Any Contracts

Before you sign a contract with debt management company, debt consolidation company or debt settlement company we suggest that you make sure you research different companies before settling on one. Ask about their fees and process. Comparison shopping gives you a good idea of whether the fees are reasonable or not. You will also be able to get a lot of details about the whole debt settlement program while asking for a quote.

The sooner you reduce your debt, the faster you will improve your credit score and your financial life. Debt management companies can help you get started.

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